Chapter 29: Cost-Benefit Analysis

Approval for funding any public transport or highway scheme normally requires that the benefits of the scheme exceed its costs. The appraisal of such projects usually entails undertaking a cost–benefit analysis (CBA), based upon the expected costs and benefits of the scheme. The purpose of a CBA is to inform decision-making; and also to maximize the welfare of society by selecting transport schemes where benefits are maximized relative to costs. In project appraisal, no method other than CBA has such a sound theoretical economic base and widespread application.

Financial accounting records “total economic value” as revenue or sales from a transport operation; and total costs as the financial cost of acquiring resources to build and operate a transport project. However, financial values differ from total welfare. Individuals derive utility from intra-marginal journeys over and above the price they pay for the journey. In CBA this “consumer surplus” is counted as a benefit in addition to the price they are willing to pay for a journey. For financial costs, CBA substitutes the concept of opportunity cost, or the social value foregone when resources are moved away from another economic activity into the transport project. Resources are valued in terms of their opportunity cost: what is being lost elsewhere in the economy if these resources are used in a transport project. If the opportunity cost is less than the financial market price of the resource, the difference is termed an “economic rent.” Economic rent is excluded as a cost in CBA.